Dollar at more than one-month lows after U.S. data

Yen boosted by stronger-than-expected growth report

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar tumbled to a more than one-month low against the yen Thursday, after U.S. government reports painted a mixed picture of the economy and the first net capital outflow in a year and a half.

The yen received a boost after government data showed the Japanese economy expanded at a faster-than-expected pace in the fourth-quarter, sparking speculation the Bank of Japan will raise interest rates next week.

"We have better-than-expected data from Japan. Many are speculating that the BoJ is going to have to hike rates now," said Naomi Fink, senior currency strategist at BNP Paribas. "The U.S. data doesn't help, especially given" the capital flows report showing dwindling flows to fund the U.S. current account deficit, she said.

Late in New York, the euro stood at $1.3141, compared with $1.3127 late Wednesday. The dollar was quoted at 119.21 yen, compared with 120.71 yen. In intraday trading, it touched 119.18 yen, the lowest level since Jan. 10.

The British pound traded at $1.9544, compared with $1.9625. The dollar changed hands at 1.2333 Swiss francs, compared with 1.2349 francs.

The Dollar Index, which tracks the greenback against the world's major currencies, fell to a six-week low of 83.94.

The odds of an interest rate cut through the first half of 2007 more than doubled, the federal funds futures market showed. Traders were pricing in a 16% chance that the Federal Reserve will lower its target on overnight rates to 5% from 5.25% by June. Late Wednesday, the odds of a cut were at 6%.

"The dollar is on the ropes as the outlook for both growth differentials and interest rate differentials continue to deteriorate," said Michael Woolfolk, senior currency strategist at The Bank of New York. "Look for the dollar for sustain more losses going into the three-day holiday weekend."

First outflow since 2005

Monthly capital flows reversed to an outflow of $11 billion in December compared to an inflow of $70.5 billion in November, the Treasury Department said. This was the first outflow since June 2005.

Net long-term capital inflows, meanwhile, fell to $15.6 billion in December from $84.9 billion in November. This is the lowest inflow since January 2002. The trade gap for the month stood at $61.2 billion. See full story.

"Today's TICS surprise moves global imbalance and U.S. twin deficit problem back on the front burner, with a red flag raised on adequate funding of the U.S. current account deficit," Woolfolk said.

But T.J. Marta, fixed-income strategist at RBC Capital Markets, said that while the data reflected increased private investors' diversification away from U.S. assets, "whether the data indicate a trend is unclear, especially given that the decline could have been driven by year-end 'window dressing' by money managers."

Factory activity

Earlier, the New York Federal Reserve Bank said its Empire State Manufacturing index rose to 24.4 in February from 9.1 in January. Economists were expecting the index to slip to 8.7. See full story.

However, a separate report showed the Philly Fed index fell to 0.6, pointing to a barely growing manufacturing sector in the Philadelphia region. See full story.

The dollar extended its losses after the Federal Reserve said U.S. industrial production fell 0.5% in January, the biggest drop since Hurricane Katrina struck the Gulf Coast in September 2005. Capacity utilization fell to 81.2% from 81.8%. Economists were expecting production to fall 0.1% and capacity utilization to slip to 81.6%. See full story.

The capacity utilization data are "disappointing," said Timothy Mazanec, senior currency strategist at Investors Bank & Trust Co. "While we'd likely to see a bounce back in Feb., the trend has been lower."

"The dollar is vulnerable after today's data that gives the doves the upper hand," he said.

Elsewhere, U.S. initial jobless claims increased by 44,000 to 357,000 in the latest week. Import prices fell 1.2% in January. The National Association of Home Builders' NAHB/Wells Fargo housing market index rose to 40 in February from 35 in January. It's the highest since June 2006. Read more.

BoJ bets

The yen rose after a government report showed the economy expanded 4.8% on an annualized basis in the quarter ended Dec. 31. Compared with the preceding quarter, the economy expanded 1.2%, the data showed.

Economists had expected a 3.8% annualized rise, and a 0.9% quarterly increase. For 2006, Japan's economy grew 2.2%, its seventh straight year of expansion. Consumer spending, meanwhile, rose 1.1% on quarter, reversing a 1.1% drop in the July-to-September quarter.

Ian Copsey, senior financial analyst at Global Forex Trading, said the most important part of Japan's GDP rise "was the rebound in private sector consumption although this was following a strong decline."

"Considering [BoJ Governor Toshihiko] Fukui's comments that rates will be hiked when growth is strong and prices stable, it would appear to provide a strong argument for this to occur at next week's" interest-rate meeting, Copsey said, in a note.

"This will keep the yen buoyant for a few more days until the meeting next week with speculation rising on a further 0.25% hike."

But Mazanec said the yen remains vulnerable because "even if the BoJ raises rates next week, it would likely be their last until after the elections, so not much change in interest rate differentials."

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